“It is the first quarter of 2017. RB Builders is aiming – yet again – to extend its reputation as a builder that thrives on both the margin and velocity sides of Return on Assets, by expanding into another new geographical market, via the late-2016 acquisition of a fourth existing homebuilding operation.

“Like previous years’ acquisitions, the newly-acquired division serves segments of the new home market deemed compatible with RB Builders’. And – like its predecessors – the newly-acquired building division has historically generated lower operating results and business outcomes than what RB Builders considers acceptable; in fact, this is the worst-performing of all the acquisitions, to-date, from the standpoint of both margin and velocity.

“As with its predecessors, RB Builders believes that it has once again acquired a building operation with satisfactory land/lot positions.

“To date, RB Builders has completed the conversion to the enterprise management technology system and started the conversion of the business and operating processes; RB Builders is confident that it can continue its track record for unifying, developing, and improving the capabilities of existing teams at acquired divisions, transforming them to ones that reflect the savvy, motivated, and mutually-accountable homebuilding team of the parent operation.

“This road has become a familiar path for RB Builders.

“HISTORY OF RB BUILDERS: Nine years earlier, at the beginning of 2008, and shortly after the end of the halcyon period known as the Age of Homebuilder Entitlement®, RB Builders had begun its own transformation process, with the objective of extracting itself from what it self-described as “the tar pits of averageness”.

“RB Builders had essentially used four initiatives: (1) a team-based performance compensation plan directed at achieving targeted results above a baseline related to a single business outcome, paid-out upon the achievement of a series of progressively-weighted milestones; (2) a method of sharing numbers that produced full operational and financial transparency; (3) accounting procedures that connected operating performance to business outcomes very effectively, via actionable data; and (4) a focused process of continuous improvement, consisting of a prioritized series of consecutively-ordered initiatives, all with short durations aimed at achieving targeted, defined, measurable results.

“As a result of this program, RB Builders had made massive strides.

“During the ensuing five-year period (2008-2012), annual Revenue had grown from $50 million to more $121 million, an increase of almost 250%. During the same period, the number of closings had increased more than 225%, from 200 houses per year to 453 houses per year. Despite the margin pressure from increasing market share so dramatically, overall Gross Margin had actually increased slightly, from 22% to 24%; as a result, RB Builders’ Gross Income had grown by more than 250%, from $11 million to almost $30 million.

“During this five-year period, Operating Expense had increased 30% (from $8.5 million to $11 million), far less than the same-period increase in Revenue. As a result, RB Builder’s Net Income had risen from $2.5 million to $16.5 million, more than six times what it had been before the company began its transformation; Net Margin had almost tripled, from 5% to 14%.

“In 2008, RB Builder’s cycle time had been 180 days; by the end of 2012, cycle time had been reduced to 65 days. In 2008, the average amount of work-in-process had been 100 houses under construction; by the end of 2012, the company been able to reduce its average work-in-process to 80 houses under construction. The reductions in cycle time and work-in-process had occurred despite more than doubling the annual number of closings.

“In 2008, RB Builders had targeted an inventory turn of 2.5x, which was actually an improvement from the preceding year; in 2012, by keeping its work-in-process at 80 houses and closing 453 houses, RB Builders had been able to more than double its physical inventory turn, to 5.7x.

“In 2008, RB Builders turned the value of its assets two times; in 2012, it turned the value of its assets almost five times. Because it had managed to maintain margins while improving velocity, RB Builders saw its main barometer of economic return – Return on Invested Assets – increase almost six-fold during the five-year period, from 11% in 2008 to 64% in 2012.

“In 2013, RB Builders had moved all of its raw land holdings and developed lot inventory off of its balance sheet, and into subsidiaries, which would have served to further increase Asset Turn – and ROIA – had those measures been restated to reflect the remaining assets.

“It had been a remarkable transformation.

“The three divisions that RB Builders had previously acquired have now met – or remain solidly on-track towards meeting – their own two-year plans for significantly increasing closings and Revenue without any increase in Operating Expense, while maintaining lower levels of work-in-process and operating under reduced construction lines of credit.

“NEWLY-ACQUIRED DIVISION: Near the end of 2016, RB Builders acquired this, its fourth homebuilding operation. In its last year of independent operation, it had closed 48 houses, and generated $12 million in Revenue; with $9.6 million in Cost of Sales now reflecting only its direct, variable costs, the operation had generated $2.4 million in Gross Income, producing a 20% Gross Margin.

“With its $1.8 million in Operating Expense now reflecting only its indirect, non-variable costs, the newly-acquired operation had produced $600,000 in Net Income, resulting in a 5% Net Margin.

“Since it carried an average work-in-process of 28 houses under construction throughout 2016, the division had a calculated cycle time of 210 days, despite job schedules that were typically 120 days; 48 closings and average work-in-process of 28 houses under construction meant the newly-acquired building operation turned its physical inventory 1.7 times in 2016.

“Adopting the policy of RB Builders, and moving all of its raw land holdings and developed lot inventory off of its balance sheet, and into subsidiaries, the newly-acquired building operation showed a restated average work-in-process of $3.85 million; Revenue of $12 million gave it an asset turnover ratio of 3.1x.

“With its Net Margin of 5% and its restated asset turn of 3.1x, the new operation had achieved an ROIA of 15.5%.”

Here are the questions the interrelated business case exercises raise:

Q: How will you address a mandate that your newly-acquired division more than double its annual closings over a two-year period, with less work-in-process, a smaller line of credit, and the same amount of overhead?

Q: How will you use Building Information Modeling to improve both the margin and velocity sides of economic return – and calculate the ROI on your BIM investment?

Q: How do you calculate your newly-acquired division’s breakeven points and rates, in both financial and unit (closings) terms, now changing as a result of your improved operating performance and economic outcomes? What accounting practices will calculating the breakeven part of Cost-Volume-Profit require?

Q: How will you create a savvy, motivated, mutually-accountable homebuilding team? One that understands the business of homebuilding as much as it does the homebuilding business? One in which every teammate has a significant financial stake in the outcome – in achieving targeted performance above a baseline in a specific business result?

Q: How will you answer RB Builders’ contention that variation – as evidenced by your 2016 cycle time, and supported by other operating performance measures – is costing your newly-acquired division between $1.3 and $1.8 million in Net Income every year? Bearing in mind, of course, that in 2016, your division only had Net Income of $600,000.

Q: How will your newly-acquired division adapt Epic Partnering™ (RB Builders’ proven program and process for creating partnering relationships and arrangements of compelling mutually-shared interests) with your suppliers and subcontractors? What are the attributes of the partnering relationship? What are the components of the partnering program? What does a transformational partnering process look like?

Q: How will you address workflow as part of an overall Business Process Improvement initiative intended to remove non-value-adding work and make the remaining value-adding work flow faster, more evenly, more smoothly, with fewer mistakes and rework?

Q: How will you use Critical Chain Project Management to change the work breakdown structure of your job schedules, in order to reduce cycle time to 96 days (from 120 days), while also assuring more reliable job completion dates?

Pipeline Workshops™

Pipeline Workshops™, sponsored by BUILDER and BuilderMT, are designed to transfer in-depth knowledge and create an intuitive, instinctive understanding of production principles and disciplines, focused specifically on homebuilding production management.